Competition in the Crosshairs
As the coronavirus pandemic passes the one-year mark, technology has taken a central role in all aspects of our lives. This has led to faster growth of China’s digital economy. To better regulate the growth of this market, China published draft antitrust guidelines in November last year, and lawyers say strict scrutiny is to be expected.
The Anti-Monopoly Law was enacted in China some 12 years ago, in August 2008. Since then, the authorities have rolled out sector-specific anti-trust guidelines for industries like active pharmaceutical ingredients and auto-mobiles, and in 2020, their focus turned to the digital economy. Zhang Gong, head of the State Administration for Market Regulation (SAMR), pointed out that the authorities had to prevent certain companies from upsetting the competitive balance with their advantages over data, technologies and capital. They also had to improve anti-trust rules faster while strengthening regulation.
Kevin Huang, partner at Commerce & Finance Law Offices, tells ALB that the new guidelines demonstrated the authorities’ determination to strengthen antitrust regulation on the platform economy industry and provided Internet companies with clearer direction to enforce antitrust compliance.
“Under the current Anti-Monopoly Law, the guidelines further specify and improve the antitrust laws in the Internet industry. Breakthroughs have been made on issues including market definition, algorithmic conspiracy, most favoured treatment, ‘either-or’ choice, big data discrimination, mandatory collection of user information, hub and spoke conspiracy, necessary facilities and filing requirements surrounding variable interest entity (VIE) structures, things that are noteworthy for companies,” Huang says.
The guidelines are almost 9,000 characters long and include 23 articles from chapters on monopoly agreements, abuse of market dominance, concentration of operators, as well as abuse of administrative power to eliminate or restrict competition. The articles clearly define what an Internet platform is and what constitutes monopolistic practices. The most discussed are the ‘either-or’ choice and big data discrimination. The former refers to the practice of requiring a seller to choose between two online marketplaces, while the latter refers to old customers paying higher prices than new customers for the same products and services due to big data discrimination.
Susan Ning, partner at King & Wood Mallesons, has further interpretations of the new guidelines. She points out that the guidelines are aimed at restricting the practices of online platform operators to limit competition in order to dominate the market. She especially highlights two noteworthy articles.
For starters, she points to Article 4 from the first chapter that concerns market definition. “Defining relevant products and markets is usually the starting point of antitrust analysis. In the Internet industry, companies may engage in various businesses that are intertwined, and these businesses can be substituted easily, therefore making it difficult to clearly define a commodity market. The guidelines also mention for the first time the concept of a multi-lateral market and emphasizes Article 3, that the antitrust regulators may deem definition of the market unnecessary when it is a case of monopoly BIG STORY
agreements or abuse of market dominance, and directly determine that the platform operators have applied monopolistic practices. We’re still waiting to see this article be put into practice,” Ning says.
She also notes Article 15 that mentions the requirement of choosing between two online platforms. “This article is seen as filling the gap in the Anti-Monopoly Law, and ‘either-or choice’ is referred as exclusive dealing. Exclusive dealing may constitute abuse of market dominance, and may not constitute monopolistic behaviour. This will need to be determined according to the case and evidence that proves the abuse of market dominance. Therefore, it remains to be seen how this article will be applied,” Ning says.
Other frequently criticized market behaviours include tie-in sales or imposing other unreasonable conditions and discrimination, big data discrimination, selling below cost and unfair pricing. The guidelines clearly lays out what constitutes these behaviours. Ning says regulating them has become an urgent matter, and the guidelines are a response to this.
Zhan Hao, managing partner at Anjie Law Firm, describes the guide-lines as a turning point of the antitrust regulators’ attitude towards regulating the Internet industry. He shares three noteworthy points from the guidelines.
“First, an operator in the platform economy is defined as a platform operator, an operator on the platform, and other operators that participate in the platform economy. And operators on the platform are put under the regulations,” says Hao.
“Secondly, the authorities took into consideration the characteristics of Internet companies and the platform economy to specify definitions of monopoly agreements and monopolistic behaviours. Third, the guidelines stipulate that concentrations of plat-form operators involving a VIE structure will also fall within the scope of the antitrust review.”
Regarding the VIE structure, the guidelines stipulate that when concentrations of operators reach a level that meets the State Council’s requirement, operators should file with the antitrust regulators. This requirement was then applied for the first time.
After the guidelines were released, Chinese regulators started to take on Internet giants.
In December 2020, SAMR imposed penalty on three companies, Alibaba, Tencent’s subsidiary China Literature and Hive Box regarding their acquisitions, the first time penalty was imposed on the grounds of failing the meet the filing requirement for concentration of platform operators involving VIE structure. SAMR also said it was investigating the merger of Huya and Douyu. In the same month, Alibaba was investigated for the alleged forcing of exclusive dealing, and online marketplaces such as JD.com, Tmall and VIPS were fined half a million RMB for unfair pricing.
Despite stricter regulation, experts believe the guidelines will optimize the business environment and benefit the industry’s development in the long run.
Huang says in the short term, Internet giants may face mounting pressure on compliance and greater legal challenges concerning their exclusive dealing and filing for concentrations before and later on, but smaller Internet companies will find greater room for development. He believes that “in the future, when market competition rules are being improved while regulations are being tightened, the business environment will be better.”
Zhan also believes that the business environment will get better when authorities clamp down on monopoly agreements, abuse of market dominance and failure to file for concentrations. “Although the guidelines are meant to tighten regulation on China’s digital economy, it doesn’t mean they limit its development. The country is still encouraging the development of digital economy, but this has to be orderly development,” he says.
TAKING IT SERIOUSLY
Experts point out that the best way for lawyers and companies to respond to China’s stricter antitrust regulation on the Internet sector is to understand the new guidelines and implement an antitrust compliance program.
Ning reminds the Internet companies that they need to take antitrust compliance seriously and the executives must take it as an urgent matter. “They should implement an antitrust compliance program in the company and carry out targeted antitrust training for employees from different functions. When it comes to innovative operation practices, they should conduct antitrust review repeatedly to minimize compli-ance risks,” she says.
Meanwhile, Huang says the guide-lines are important on compliant operations for Internet companies. Companies should refresh their under-standing of antitrust regulation and strengthen compliance awareness, design, improve and implement a compliance program and be prepared for regulation.
“Antitrust lawyers need to provide more professional legal services for the Internet companies. Lawyers need to keep learning about the Internet industry and identify risks for clients in the complicated platform economy industry,” Zhan says. He also feels that there are not many lawyers who are currently familiar with antitrust and the Internet industry.
Huang, on the other hand, mentions lawyers’ analytical and judgment skills. “When judging whether the client’s business model and decisions are law-abiding, lawyers need to conduct a more thorough and comprehensive analysis according to the guide-lines… Both lawyers and companies can take the guidelines as reference to understand the regulators’ focus and rationale to make the right call for potential legal risks,” he says.
The digital economy is booming not just in China. The rise of the Internet giants has brought about concerns of market dominance and caused regulators worldwide to take note. Last year, the EU introduced the Digital Services Act and Digital Markets Act to set strict requirements for carrying out business, France served Google and Amazon with hefty fines, and some U.S. states filed an antitrust suit against Facebook and Google.
Antitrust has then become a hot topic in the legal sector at home and abroad. Experts share what trends to keep an eye out for and what to take note of.
Ning predicts that as data becomes a valuable resource, the trend of data compliance and antitrust compliance crossing paths will be more notable. In 2021, the internet industry will be a key area of focus for antitrust regulators around the world. She also notes that the healthcare industry is another area of focus.
“Due to the pandemic, pharmaceutical companies are enhancing collab-oration and increasing M&A activities will become a trend. Healthcare sectors such as API could be an area of focus for the antitrust regulators worldwide,” she explains. Back in China, lawyers should note that the revision of the Anti-Monopoly Law is expected to be completed this year. This has been listed as a key task on the regulatory front this year.
Huang also believes that antitrust regulators in China and abroad will only continue to step up legislation and law enforcement, and remain focused on the antitrust issues in digital economy. In China, the Politburo was clear during its meeting that it would “strengthen anti-monopoly efforts and prevent the disorderly expansion of capital,” he says.
Zhan also expects to see more anti-trust investigations into and lawsuits against Internet companies in China. He reminds his peers that antitrust lawyers should closely monitor the antitrust development in the Internet industry at home and abroad, expand their knowledge, study the features of Internet platforms, digital economy and the legal aspects of big data in depth, to evaluate the antitrust risks of the client’s core and derivative businesses and help them prepare for antitrust challenges in the future.
To contact the editorial team, please email ALBEditor@thomsonreuters.com.